“That’s Why I’m Up Here in the Booth”

Corporate law pundits were abuzz yesterday with the possibility that – oh my god – Wachtell might have had what we used to call a “bust” – just a good old-fashioned mistake in contract drafting. This had to do with what would trigger the end or cancellation of J.P. Morgan’s guarantee of Bear Stearns’ liabilities. The gist of the buzz was the fact that the guarantee would go on for a year if the BS shareholders voted the deal down, as long as the Bear board did not back down from its recommendation of the deal to the shareholders.

This is all moot now, because there has been a revised deal, and I was too busy trying to get ready for class yesterday to follow it in real time. But without undue contortion to slap myself on the back, I did send this e-mail (just slightly edited to get a term correct) to a number of the pundits last night:

The effect of this is to get a guarantee on one year’s worth of covered liabilities. It’s not forever.

I don’t know much about the securities being guaranteed. Is this a “floating” guarantee under which liabilities are created and discharged on a rolling basis? If so, for how much would JPM be on the hook at any one time?

I could see an argument the Bear board could have made in support of the lockup for one year: in exchange we got a one-year guarantee as long as we didn’t change our recommendation, and we could control that. So while we may have blocked other bidders, we may have also insured the survival of the business.

It’s possible this was a Wachtell mistake. But I thought I’d take a shot at Larry Solum’s principle of charitable interpretation.

The measure “seems rational,” given the circumstances at the time, when J.P. Morgan was trying to signal to the market that it would stand by Bear’s obligations, says Lawrence Cunningham, a law professor at George Washington University. “Bear was fighting for its life and a handful of forces were at play and it makes sense that J.P. Morgan would want to add credibility to the deal by giving a big guarantee.” Observers add that J.P. Morgan might not have anticipated the shareholder resistance that surfaced to the original deal.

In any event, it does demonstrate, as the ex-football coaches who do color commentary observe from time to time, it’s a lot easier to be up in the booth providing analysis than down on the field making the decisions!